Choosing the right business structure to conduct business is the first step in starting a new business and can make all the difference in your business’s success. The type of structure you choose will determine your legal liability, tax obligations, and how you run your business. With sole proprietorships and partnerships to LLCs and corporations to choose from, it can be overwhelming.
Working with a Westchester business lawyer can be invaluable in this process. In this article, we’ll walk you through the different types of business structures and how working with an experienced attorney can make all the difference in your decision for your business.
Business Entity Definition
A business entity is a legal entity that allows individuals to do business. It defines how a business operates, its responsibilities, and its relationship with the law. There are different types of business entities each with its characteristics that impact legal and financial matters.
Why Choose the Right Business Entity
When choosing a business entity you need to understand the implications. Each type has its own legal responsibilities and tax obligations, particularly in terms of business assets. For example, a sole proprietorship is simple but exposes the owner to unlimited personal liability. An LLC provides asset protection while allowing flexibility in taxation.
The Differences in Business Entities
Understanding these will help you make informed decisions. The right choice will protect your assets and your tax situation. It will also affect how easily you can raise capital or attract investors.
Types of Business Entities
Choosing the right business entity is crucial for your business. Each structure has its characteristics, pros and cons. Here’s a breakdown of the common business entities you can choose from.
Sole Proprietorship
A sole proprietorship is the simplest structure. One person owns the business.
- Characteristics: Easy to set up, minimal paperwork.
- Liability: The owner has unlimited personal liability, and personal assets are at risk if the business incurs debt.
- Tax Treatment: Income is pass-through income, reported on the owner’s tax return.
Partnership
A partnership is two or more individuals who own a business.
- Features: Shared decision-making and shared resources.
- Liability: Partners are jointly liable for business debt, and personal assets are at risk.
- Tax Treatment: Like sole proprietorship, partnerships are pass-through.
Limited Liability Company (LLC)
An LLC combines the flexibility of a partnership with corporate liability protection.
- Liability Protection: Members have limited liability and personal assets are protected from business debt.
- Tax Flexibility: LLCs can choose how they want to be taxed, as a corporation or as a pass-through.
- Management Structure: Members can manage the LLC or appoint managers to run the business.
C Corporation
A C corporation is a separate entity that has strong liability protection.
- Independent Status: This structure can enter into contracts, sue, and be sued independently of its owners.
- Double Taxation: Profits are taxed at the corporate level as corporate taxes and again at the shareholder level when dividends are distributed.
- Stock Issuance: C corporations can issue stock to raise capital, good for larger businesses.
S Corporation
An S corporation has corporate liability protection and pass-through taxation.
- Tax Benefits: Income, losses, and tax credits pass through to shareholders, avoiding federal income tax and eliminating double taxation.
- Limitations: S corps are limited to 100 shareholders and must meet IRS requirements.
- Election: To be an S corporation a business must file Form 2553 with the IRS.
Limited Liability Partnership (LLP)
An LLP is like a general partnership but has personal liability protection for its partners.
- Professional Services: Commonly used by professionals like lawyers and accountants.
- Tax Treatment: Partners report their share of income on personal tax returns and pass-through taxation.
- Liability Protection: Partners are not generally personally liable for other partners’ negligence.
Non-Profit Organization
A non-profit organization is for charitable, educational, or social purposes.
- Purpose: Non-profits serve the public good, not profits.
- Tax-Exempt Status: These can apply for tax-exempt status under IRS rules, which may exempt them from paying state or federal income taxes on their profits.
- Compliance: Non-profits must comply with specific rules and reporting requirements to maintain status.
Now that you know the business entity types, you can make an informed decision that fits your goals. Each has its own rules, benefits, and drawbacks so consider your needs carefully.
Choosing a Business Entity
Choosing the right business entity or other business entity is not a decision to be taken lightly, it can impact your business in many ways. Here are several things to consider.
Legal Protection
Different business structures offer different levels of liability protection. For example, an LLC can protect your assets from business debt. A sole proprietorship puts you at unlimited personal liability. Understanding how these protections work is key to protecting your assets.
Tax Treatment
Tax obligations vary greatly across business structures. Sole proprietorships and partnerships have pass-through taxation, where profits are taxed on the owner’s tax return, and general partners in partnerships must pay self-employment taxes on those earnings. C corporations have double taxation, corporate profits are taxed and then shareholders are taxed again on dividends. Knowing these differences will help you choose the most tax-efficient structure for your business.
Paperwork
Each business entity has its paperwork. For example, an LLC requires articles of organization, and a corporation requires articles of incorporation. Ongoing compliance documents like tax returns are also required. Knowing these will save you time and avoid legal headaches.
Ownership Structure
Ownership structures can be very different among business entities. In a partnership, ownership is shared and profits are divided according to the partnership agreement. A corporation has shareholders who own shares of the company. Knowing how ownership is divided and managed will help you build a solid foundation for your business.
Growth and Funding
If you plan to grow your business or seek external funding, consider how each entity facilitates these goals. Corporations can issue stock, making it easier to attract investors. LLCs have flexibility in raising capital but may have limitations compared to corporations. Review your growth plans to choose an entity that fits your vision.
Now that you have considered these factors you can decide on the right business entity for you.
New York State Registration
Once you have chosen a business entity in New York, the next step is to register it with the state. This involves submitting specific documents and paying fees. New York has its own rules so you need to know what is required to comply with state regulations.
Register a Business in New York
- Choose a Business Name: Make sure your desired business name is unique and compliant with New York state naming rules. You can check the availability of your business name on the New York Department of State’s website.
- Prepare and File Required Documents: Most entities will need to file either the Articles of Organization (for an LLC) or the Certificate of Incorporation (for a corporation). These must be filed with the New York Department of State.
- Get a Certificate of Assumed Name: If you will be operating your business under a name different from its legal name, you must file a Certificate of Assumed Name with the New York Department of State.
- File for an Employer Identification Number (EIN): An EIN is required for tax purposes and can be obtained from the IRS. This is needed for businesses that will hire employees or open a business bank account.
- Complete Any Additional State Requirements: Depending on your business type and location, you may need to get specific licenses or permits from New York state or local government offices.
- Pay Fees: Fees for filing and licenses or permits vary by business entity and services required.
Consult With an Experienced Westchester Business Law Attorney Today!
If you’re unsure about which business entity is best for your company, don’t navigate these important decisions alone. The right choice can impact everything from your liability to your tax obligations and your ability to raise capital. At Rosenbaum & Taylor, our team is here to help you understand the nuances of each business entity and guide you toward the best decision for your unique situation.
Contact us today at [phone] for a free consultation ASAP!
